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8Islamic Economic Studies Vol. 17 No. 2significant at the five percent level. This observation is confirmed by the negativecorrelations reported in the table except for the Asian fund.Hassan and Tag el-din (2005) adapt duration dependence tests to analyzeIslamic mutual funds of the DJIM. The fundamental idea of the tests comes fromsurvival analysis frequently used by engineers and biostatisticians. According tothe theoretical rational speculative bubbles model, if bubbles do not exist, runs ofpositive excess returns should not display the duration dependence. To render thisimplication testable, returns are transformed into series on positive and negativeobserved excess returns. Then, the authors examine the probability that a run — asequence of observations of the same sign — of positive excess return ends haspositive dependence or negative hazard function with the length of the run. Thisapproach is reliable and robust since duration dependence is not affected byfundamental price movements and is more unique to bubbles unlike the traditionalmeasures of detecting bubbles such as autocorrelation, skewness, or kurtosis (formore details, see McQueen and Thorley (1994)). They use both weekly andmonthly data of the DJIM and AMANX and AMAGX to test for the speculativebubbles in these markets. Their results show that none of the weekly and monthlyreturns of AMANX, AMAGX, and the DJIM show statistically significantevidence of speculative bubbles during our sample periods. Kia (2001) findssimilar results for Canadian general stock markets.Hassan, Antoniou and Paudyal (2005) examines the potential impact of IslamicShar ah screening on the Islamic investment portfolio performance vis-à-visconventional portfolio. Since they examine index funds, their results are notconfounded by transactions costs or management fees. They use a variety ofsimilar methods as used in this present study and use DJIM databases from 1996-2003 period. They find similar results as in our study as that Islamic funds do notnecessarily perform worse than conventional index funds.Khathatay and Nisar (2007) reviews and compares the Shar ah screening rulesused by three organizations such as Dow Jones Islamic Indices of USA, Securitiesand Exchange Commission (SEC) of Malaysia, and Meezan Bank of Pakistan byemploying March 2005 Bombay Stock Exchange 500 stocks. They conclude thatDJIM is the most conservative and Malaysian SEC is the most liberal. Based on theempirical results, they propose an independent set of norms that better reflect theobjectives of formulating Shar ah compliance. They propose a Shar ah ratingagency that will help promote this industry and argue that total asset is a betterdivisor than market capitalization in financial ratio filters.Abdullah, Hassan, and Mohamad (2007) examines the relative performance of14 Islamic funds and 51 conventional mutual funds in the Malaysian capital marketover January 1992-December 2001 using a number of methods such as Sharpeindex, adjusted Sharpe index, Jensen Alpha, Modigliani measure, and Timing and
Hassan and Girard: Faith-Based Ethical Investing: The Case of Dow Jones Islamic Indexes9selectivity ability. In their study, Islamic funds performed better than theconventional funds during a bearish market, while conventional funds performedbetter than Islamic ones during a bullish market. Including Islamic mutual funds ina portfolio helps hedge the downside risk in adverse economic conditions. Islamicand conventional funds have a diversification level that is less than 50 percent thediversification level of the market index proxied by Kuala Lumpur CompositeIndex (KLCI). They conclude that there is a poor selection and timing performancein both Islamic and conventional mutual funds.Abderrezak (2008) employs 3 different benchmarks (conventional, Islamic andethical benchmarks) and uses 46 Islamic equity mutual funds as used in Elfakhani,Hassan and Sidani (2005) study over January 1997-August 2002 to examine therelative performance of Islamic equity mutual funds. He uses similar methodologyas Elfakhani, Hassan and Sidani (2005) and finds Islamic funds perform poorlyagainst their respective indices. The co-movement of IEFs returns with the market,measured by the betas, is low. Further, he finds poor evidence for selectivity. IEFsare significantly affected by small cap firms and growth preference stocks.However, he does not find any significant performance differences betweenIslamic and ethical funds using Fama’s performance measures. Finally, he foundthat IEFs do suffer from lower diversification.Kräussl Hayat (2008) finds, on average, there is not any significant performancedifference when IEFs are benchmarked against Islamic and conventionalbenchmarks during normal market condition. A closer look at the bear market of2002 using conditional CAPM, they document that IEFs does significantlyoutperform the Islamic and conventional market indices. They also find that IEFspossess superior systematic risk-to-return ratios, thus, they argue that these IEFs“seem most attractive as part of a larger fully diversified portfolio like a fund offunds.” However, consistent with previous studies, they do not find any evidencefor market timing ability. In their study, they use 59 Islamic equity funds over2001-2006 period and their sample is further divided into global, Malaysian, andother local regions. They use a variety of unconditional and conditional measuressuch as Jensen’s measure, Sharpe ratio, Treynor ratio, Modigliani and Modiglianimeasure, TT measure, and the information ratio. Further, they use Treynor andMazuy (1966) measure for market timing and conditional CAPM for negativemovements.Mansor and Bhatti (2009) use yearly data of Malaysian mutual funds industryfrom 1999 to March 2009, and daily return data of Malaysian mutual funds fromJuly 1, 2008 to May 10, 2009 to analyze the performance and growth rates ofIslamic mutual funds and conventional mutual funds in Malaysia. They use nonriskadjusted average returns, standard deviation, and correlation analysis. They donot provide any statistical tests except for Jarque-Bera test. There is strongcorrelation between Islamic mutual funds and conventional mutual funds. They are
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